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Fixed-Fee Engagements in Litigation Cases: Why and How

By Michael Sherman

Making the argument for why fixed fees are better than hourly billing, along with practical tips for how to make the switch.

“It is impossible for a lawyer to charge a flat fee in a litigation case”—I have heard this statement countless times over the course of my nearly 15 years of law practice. Meanwhile, that entire time I have been charging fixed fees in my divorce litigation practice.

Most of the naysayers making such comments base their argument on the premise that litigation cases are too unpredictable to be able to determine a reasonable fee with any certainty. But I would argue that divorce litigation is about as unpredictable as it gets. In divorce cases, since you are dealing with parties that have ongoing, often hostile relationships, as they continue to interact with one another the “facts” of your case are continually evolving. Frequently, for better or worse, the case you have to present to the judge is very different from the one that originally walked in your office door.

Nevertheless, for all of my client matters, most of which have involved divorce litigation, I have charged flat fees. I’ve heard it said that often “conventional wisdom” is more convention than it is wisdom, and I believe that to be the case with regard to applying fixed fees to litigation cases. My aim in this article is twofold. First, I want to share some of the advantages to fixed-fee engagements by sharing some answers to the question “ why consider fixed fees?” Second, I aim to get practical and discuss how to approach these engagements, including essential clauses that should be included in the representation agreement.

In talking to other lawyers about charging fixed fees, I’ve come to the conclusion that most continue charging by the hour instead of switching to fixed-fee billing for one of two reasons: (1) they are not convinced that charging fixed fees is better than billing by the hour (i.e., they haven’t found a satisfactory answer to the “Why?” question), or (2) they are convinced that it would be better to switch to fixed-fee billing, but they haven’t figured out how to do so (i.e., they haven’t found a satisfactory answer to the “How?” question). My hope it to answer both of those questions in this article.

Part I: Four Advantages to Fixed-Fee Pricing—Or, Why Charge Fixed Fees?

Before I explain the method I use to charge fixed fees, it will be helpful to review some of the benefits to doing so. Some may consider this exercise unnecessary. After all, who likes accounting for and entering their time in six-minute increments every day? However, it is my experience that before lawyers are willing to attempt something as radical as getting rid of their timesheets, it helps to make explicit what they may already realize intuitively.

So, what follows are four advantages of charging fixed fees instead of billing by the hour. These advantages are adapted from a chapter in a seminal work on fixed-fee pricing for professional services, Ron Baker’s Professional’s Guide to Value Pricing (Sixth Edition, CCH, 2005). That chapter actually identifies 15 advantages. However, the four I list here are the ones that I’ve personally experienced to be the most obvious, compelling and beneficial in my own practice.

• Fixed Fees Provide a Competitive Advantage in the Marketplace. It takes only a moment’s reflection to understand why this is so. Would you rather know how much something is going to cost before you buy it or not? The answer is obvious. When I discuss the fact that I charge fixed fees, I explain to my prospective clients that I don’t ask them to write me a blank check like the lawyer charging them by the hour does—and they immediately get it. Clients love the certainty of fixed-fee pricing. The fact that I will quote a prospective client a fixed fee gives me a significant way to positively differentiate my practice from my competitors.

• Fixed Fees Convey Experience. When other lawyers try to convince me that you can’t charge fixed fees in litigation cases because they are too unpredictable, it makes me wonder how many cases they have litigated. Of course, the cases are often unpredictable. But they are predictably unpredictable within predictable parameters! So, factor that in to your fee. I’ll address that more in the second part of this article. But, for now, look at it from the client’s perspective. Lawyer A says he is unable to tell me what the total fee is going to be because he doesn’t know how much time he’ll have to expend (notwithstanding the fact that the only reason I care how much time you’ll have to expend is because you are proposing to bill me by the hour!); but Lawyer B tells me that based on her experience these are the things she anticipates we will likely have to do and this is what it’s going to cost me. Which engenders more confidence and trust? Which expresses that the lawyer has experience in dealing in these types of cases?

• Fixed Fees Improve Communication. How can we be trusted advisors to our clients if they are hesitant to call us when they have important questions about a particular course of action? How can they feel free to call us if they know every time they do so the clock is running? No one likes to be nickeled-and-dimed for every phone call and e-mail communication they have with their lawyer. The first time a client calls you with an important question and a few weeks later gets an invoice for a $100 phone call, that client may have learned the answer to his or her question. But the client definitely learned to try not to call you next time.

• Fixed Fees Encourage Efficiency in the Practice. Billing by the hour, on the other hand, encourages inefficiency. If I am billing by the hour, I have no incentive to implement internal procedures to complete work efficiently. In fact, I have a major disincentive from implementing such procedures! If my prices are set on a fixed-fee basis, I have an incentive to put systems in place to complete the work as efficiently as possible. Obviously, efficiency should not trump effectiveness when representing the client’s interests. But, as long as we are not being efficient at the expense of effectively representing our clients’ best interests, then implementing such internal processes and procedures will allow us to become more profitable. We will realize the benefits of our investments in technology and training, which in turn will help us to lower costs, more predictably deliver consistently excellent service, and increase profitability.

Part 2: How to Implement Fixed-Fee Pricing in Litigation Cases

So, you are convinced of the benefits of charging fixed fees for your services. Your problem is you are not sure how to do that in litigation cases. We’ve already established that litigation cases are unpredictable. The precise services you’ll have to take may vary depending on what judge you get, who the opposing lawyer is, the relationship of the parties and a host of other variables.

What follows is my approach to charging fixed fees in a way that allows me to give the client certainty about the fee and takes into account the different variables that can come in to play in litigation cases.

First, divide the matter into the various phases of a “typical” case and charge a fixed fee for each phase. So, for example, in a contested divorce case, you might break the case down into four phases of litigation: (1) the initiation phase, (2) the discovery phase, (3) the trial preparation phase and (4) the trial phase. You could have more or less phases, but the simpler you can keep it, the better.

As an experienced divorce litigator, I know what will be necessary when I initiate a divorce case. I’ll have to draft pleadings, respond to pleadings, perhaps file a motion, and there may be a court appearance or scheduling conference. There will surely be some time spent communicating with the client, doing initial fact finding, explaining the process and so forth. I can predict, within certain parameters, what I will likely have to do in each phase of litigation. I take that knowledge and combine it with the complexity of the issues in the case to determine how much to quote for each phase of litigation.

So, in the divorce example, I know that the presence of these factors will increase the complexity of the case: one or more spouse is a business owner, custody is in dispute, there are allegations of fault, it is a long-term marriage, the marital estate has a high value, etc. The more of these factors that are present, the more I increase the fee. You could go so far as developing a pricing matrix that adds some predetermined amount to the price for each of those factors. I don’t do that. Instead, I take a more subjective approach. But I do take them into account when deciding what to charge for each phase.

So, I know what I’m likely to have to do in each phase. I know what the critical issues are in my cases that can increase the complexity. Based on that, I’m able to quote a fee that fairly compensates me, while still providing the client with certainty about what the fee will be.

Admittedly this is more art than science. At first, you may charge less than you “should have.” But even that is an investment in learning the art of fixed-fee pricing. And one I am glad I made. Now, with very rare exception, do I make a major pricing error either too high or too low.

Essential Elements to Include in Your Fixed-Fee Representation Agreements

That being said, there are still things you should do to in your representation agreement to try to mitigate any gross errors you might make as you make the switch to this approach. Here then, briefly, are four essential elements you should include in your representation agreements.

• Legal Services to Be Performed. Probably the most important thing to establish in your agreement is the scope of services. You must address what is and what is not included in the fixed fee. I like to be as exhaustive as possible in the list of services to be performed in order to communicate value to the clients. (They rarely understand or imagine all that goes into representing them and preparing a case for trial.) In my divorce agreement, I list 10 different broad services. Examples are: “Appearing at Any Pre-trial Conferences or Hearings Set by the Judge,” “Filing Petitions for Interim Relief, If Necessary and Appropriate,” and “ Drafting and Filing Appropriate and Necessary Subpoenas for Witnesses and/or Documents.” For each of these, I explain in a sentence or two what is involved in performing that service.

• Representation Outside the Scope of the Agreement. Perhaps more important than defining what is included is defining what is not. Here is a very basic sample paragraph that I use to address this issue:

“This Agreement does not apply to any other or subsequent legal matters. Also, if an unanticipated need arises (such as, but not limited to, mediation, depositions of parties other than you or your spouse, post-trial motions and/or appeals, etc.), then we agree to perform such work only at a separate, mutually agreed upon fee. Such services will be priced separately to you by utilizing a Supplemental Service Agreement (a document that will set out the terms of such additional services).”

• Definition of Phases and Fees. The agreement should clearly list, describe and define each phase of the litigation. In addition, it should include a list or schedule of fees for each of the phases. It is best to tie each phase to a date or milestone in the case. Using the four phases described above, you might explain that the initiation phase begins immediately, the discovery phase begins 30 days later, the trial preparation phase begins 90 days before the trial date and the trial phase begins 30 days before trial. These are merely examples that you could (and should!) adjust to fit your courts’ dockets and your own approach to litigation.

• Payment Terms. Obviously you need to set out the payment terms you expect the client to follow. I require the fee for each phase be paid when that phase begins, but you might allow payments for each phase over a specified period of time if that is more appropriate for you and your clients. In addition, I provide the following paragraph, which explains that the client only pays through the phase of the litigation that the case enters:

“We are often able to reach a settlement of your case before the matter actually goes to trial. You are only responsible for the fees through the phase reached at the time the case is resolved. For example, if the case settles prior to the Third Phase of the litigation, then you do not owe the Trial Preparation Fee or the Trial Fee. If the case settles prior to the Fourth Phase, then you do not owe the Trial fee. If we reach 30 days out from the initial trial date and the case is not yet resolved (i.e., we enter the Trial Phase), the balance of the trial fee is due.”

Conclusion

Seneca said, “The mind is slow in unlearning what it has been long in learning.” Zeno said, “The most necessary part of learning is unlearning our errors.” They were both right.

The billable hourly model is what we know. It is familiar. Despite its shortcomings, in many ways it is comfortable. It is difficult to imagine a model of delivering legal services that doesn’t involve setting the price based on the number of hours expended.

Nonetheless, it is necessary that we “unlearn” our errors. It is my hope that this article is a step, no matter how small, in our collective unlearning of the error of the billable hour model.

About the Author

Michael Sherman currently maintains a "virtual law practice" in Alabama. His primary areas of focus are family law and estate planning. He has recently launched two new blogs, which can be found at www.AlabamaWillAdvisor.com and www.AlabamaDivorceAdvisor.com.